Economic uncertainty is widespread, which in turn makes recovery ever more difficult.

“Uncertainty is [a] significant risk,” according to a survey of CFOs by Deloitte. It finds that “56% of CFOs rate the level of uncertainty facing their business as being ‘high’ or ‘very high.’ As one respondent put it, ‘Everyone is waiting for something very bad to happen.’” Respondents to the Deloitte survey also see a 54% chance of a double-dip recession for the UK.

The Guardian’s Larry Elliott identifies a “triple whammy” of factors making UK economic recovery problematic: “falling real incomes, austerity and the crisis in the eurozone”

XpertHR’s economic commentary for February 2012 looks in detail at the impact of each of these factors, and rounds up the latest data on key economic indicators of relevance to HR professionals and reward practitioners.

The UK’s ongoing income squeeze

Let’s start with falling real incomes.

An ongoing “income squeeze” is affecting UK households. This is according to a Bank of England survey of 1,985 UK households conducted in September 2011 by NMG Consulting.

The research shows that a majority of UK households experienced an “income squeeze” over the year to September 2011. The outlook for incomes in 2012 is “uncertain” as economic austerity measures take hold.

Across the survey sample, the average pre-tax household income was £2,850 per month. The average monthly ‘available’ income (defined as disposable income after tax, national insurance and housing costs) for UK households was £720 per month. Available income had fallen over the preceding year by £46 per month.

The Bank of England identifies three key factors contributing to the income squeeze: the January 2011 VAT hike; rising energy and import prices; and economic austerity measures.

Bank of England Monetary Policy Committee (MPC) member Ben Broadbent argues that there could be reason for some (cautious) optimism. He says that a number of the factors identified as contributing to the squeeze on household incomes are expected to ease over the coming months:

We would be wrong to paint only a gloomy picture. We have had a couple of really big hits to household income over the last two years. Between them, VAT and commodity prices might have taken 2.5% out of household incomes, and we’re not going to have those again. VAT is not going up again and petrol and oil prices look pretty stable. That’s a big effect which will add to real household income.

XpertHR Pay and Benefits Editor Sheila Attwood reports that preliminary analysis of January 2012 pay awards for private sector workers suggests that “for many private sector workers, pay rises higher than the levels seen in 2011 are a real prospect.” She says:

Pay rises effective in January 2012 – exclusively in the private sector due to a lack of public sector bargaining at this time of year – are worth a median 2.8%.

XpertHR will publish its analysis of whole economy pay trends over the three months to 31 January 2012 on Friday 24 February 2012.

UK economy shrank by 0.2% in Q4 2011

The UK economy has lapsed back into negative territory, with gross domestic product (GDP) contracting by 0.2% in the fourth quarter of 2011. This is according to latest GDP estimates published by the Office for National Statistics (ONS) last week (on Wednesday 25 January 2012).

This lapse into negative growth means that a double-dip recession is possible. But it is not necessarily inevitable:

It is possible that estimates of GDP growth in the fourth quarter of 2011 will be revised upwards in subsequent data releases, taking it back into positive territory.

As we recently noted, growth in the second and third quarters of 2012 could also be boosted by an “Olympic bounce.”

Prospects for economic recovery: Is flat the new growth?

Double-dip recession remains a concern, but many commentators believe it could yet be avoided, and that GDP growth at or around nil is a more likely scenario. For example, Sunday Times Economics Editor David Smith says we might “have to get used to the idea of flat being the new growth.” He notes that the UK’s lapse back into negative territory could hit already-faltering consumer confidence hard.

Here is a round-up of expert GDP forecasts published over the past month.

“We believe UK GDP will stagnate overall until mid-2012, with one quarter very likely in negative territory,” says British Chambers of Commerce (BCC) Chief Economist David Kern. But BCC Director General John Longworth notes that “a new recession is not a foregone conclusion.”

The EEF expects 1% GDP growth in 2012. However, “the downside risks to growth are even more marked” than at the start of 2011.

The Ernst & Young ITEM Club forecasts that UK GDP will run at 0.2% in 2012, rising to 1.8% in 2013 and 2.8% in 2014. It says that the UK economy is “likely to remain stalled until the second half of [2012,] when falling inflation should provide a platform for a consumer recovery,” and that “a serious double dip” is not envisaged. However, it also cautions that even this “optimistic assumption” presupposes a speedy and successful resolution to pressing economic problems in the eurozone, China, and other territories.

The IMF has slashed its forecast for UK GDP growth in 2012 from 1.6% to 0.6%. It predicts a “mild recession” for the eurozone ,with GDP expected to contract by 0.5% in 2012. IMF Economic Counsellor Olivier Blanchard says: “The outlook for growth is mediocre. [...] The world recovery, which was weak in the first place, is in danger of stalling. The epicentre of the danger is Europe, but the rest of the world is increasingly affected.”

Inflation appears to have embarked on a downward path, but remains elevated. Indeed, the latest official inflation data release from ONS brought news of the second anniversary of above-target inflation:

Consumer prices index (CPI) inflation fell back to 4.2% in December 2011 (down 0.6 percentage points from 4.8% in November). Despite this fall, CPI has now notched up its second anniversary of coming in consistently above the Government’s 2% inflation target rate, just as it has for each successive month since December 2009.

Retail prices index (RPI) inflation dropped to 4.8% in December 2011, a fall of 0.4 percentage points from the previous month’s figure (5.2%).

At present, the consensus view among economic commentators is that inflation will continue to fall back throughout 2012. For example:

The Ernst & Young ITEM Club says “falling inflation should provide a platform for a consumer recovery” in the second half of 2012. It expects CPI to average 2.3% in 2012, slowing further to 1.9% in 2013.

However, the story of inflation in 2012 may not prove this straightforward. Falling inflation could cause problems of its own. And it is also possible that a spike in oil prices could apply new upward pressure to inflation. The Guardian sums up this situation:

[I]it may be that by the end of 2012, it’s deflation, not inflation we’ll be worrying about – though if Iran carries out its threat to close the strait of Hormuz, and choke off oil supplies to the west, all bets are off.”

The Economist notes that “some 20% of world oil production passes” through the strait of Hormuz, and that “supply disruptions of that magnitude in the past were associated with oil price increases of between 25% and 70% – and with American recessions.”

Eurozone crisis intensifies further

Even the “glimmer of hope” offered by falling inflation is contingent on a successful resolution of the eurozone crisis (as an FT survey of leading economists points out).

The ongoing crisis in the eurozone is the second factor in the “triple whammy” facing the UK economy.

Concerns are emerging that a double-dip recession is possible for many eurozone countries. The IMF World Economic Outlook report says that “the global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.” The IMF says “the euro area economy is now expected to go into a mild recession in 2012.” It has slashed its global GDP growth forecast for 2012 from 4% to 3.3%

The draft euro-plus treaty “sets up a framework and a timetable for the evolution of European economic policy as mediated by EU institutions that, if not substantially amended, all but guarantees Britain’s departure from the Union [by 2017].” This is according to New Statesman blogger Rafael Behr.

At the start of this week, William Hague warned that the eurozone crisis is having a “chilling effect” on the UK economy. Yet some commentators remain convinced that the eurozone crisis can and will be resolved relatively quickly. HSBC Chairman Douglas Flint believes European leaders will take “firm action” to resolve crisis by second half of 2012:

It would be naive to think that this can be solved within weeks, but my view is that it will be a reasonably short timeframe, certainly by second half [of 2012].

The impact of economic austerity measures on economic growth is the third factor in the “triple whammy” facing the economy.

A number of official bodies have issued warnings on the potential impact of austerity on growth:

Economic austerity is likely to produce further uncertainty as 2012 unfolds, Bank of England research suggests. Nearly half of UK households (48%) surveyed say they have been affected by austerity measures over the past year. But looking ahead, more than two-thirds of UK households (69%) expect austerity to affect them over the coming year. The three main expected effects of austerity are: higher taxes (cited by 32% of respondents), lower income (24%) and less spending on services used (20%). Fear of job loss is also prevalent, and rises sharply in households “that were reliant on the public sector for more than half of their income,” to around one in three.

The ILO says: “Recently observed cuts in labour market spending, such as reduced support for programmes for young jobseekers in the United Kingdom, are likely to come with substantial long-term adverse consequences for labour market prospects.”

“Expansionary contraction is oxymoronic although I don’t think you actually need the prefix oxy.” This is according to Harvard professor Larry Summers, speaking at last month’s World Economic Forum in Davos.

However, it is unlikely that Chancellor George Osborne will announce any rethink of austerity measures when he delivers his Budget 2012 speech next month (on Wednesday 21 March 2012).

Latest DWP projections suggest that “an extra 750,000 people will join the ranks of the long-term unemployed over the next four years,” the Guardian reports. It says the DWP forecasts “show an increase of 32% from 2.4 million to 3.3 million in the number of people expected to be entered into the Work Programme – the government’s flagship project for finding work for those who are typically out of work for longer than 9-12 months.”

The Ernst & Young ITEM Club expects unemployment to “peak in the first half of 2013 at almost 3 million, 9.3% of the labour force, before beginning to fall back.”

“Long-term uncertainties over the state of the economy will force employers to put at least some of their hiring strategies on hold, and to think harder before employing new staff; a situation that will force significant changes in the behaviour of job seekers in the year ahead.” This is according to the latest Quarterly Recruitment Review from Jobsite.

[T]he Bank has set itself fairly clear limits on the kind of bonds it will buy, and how much. If the MPC is still worrying about deflation and recession a year from now, those limits could well start to bind. [... HSBC research suggests that] the MPC has significantly less than £500 billion in government bonds available for quantitative easing in 2012, £275bn of which it has already bought, or is committed to buying in the next few weeks. And that is the absolute limit.

So there is a ceiling on quantitative easing.

Even the Bank of England could be feeling the squeeze before 2012 is out.